5 personal finance tips every freelancer should know

It’s a bold and respectable life decision to make your living from your art, but it’s not an excuse to shut your eyes and hope your finances sort themselves out. As a freelancer you are also a business owner, and you need to tend to every facet of your business to ensure that it’s a sustainable operation – not just the creative department.

Here are 5 personal finance tips that every freelancer should know.

1. Don’t bury your head in the sand

Artists don’t like thinking about finance. If that weren’t true they would have gone to school for accounting and might be making a six figure income instead of deciding between a creative cloud subscription or paying rent. Moreover, there is a certain stigma surrounding talk of personal finances, particularly the nitty gritty details and unpleasant realities of past financial mistakes. This partly has to do with a misconception that artists, as right brain thinkers, can’t be bothered with the linear left brain complexities of personal finance.

As a freelancer you need to get over both of these mental hurdles. As of now it’s in your personal freelance CEO job description to manage your finances without excuses.

2. Plan for ups and downs

Freelancing is a feast or famine career: you likely earn vastly different amounts from month to month depending on the number of jobs that come your way. Even as your earnings grow overall, this will probably never change. So instead of considering your productive times as “normal” and everything else as a fluke, accept the slower months as an inevitability and plan for those times by getting a realistic sense of your average income.

What did you earn last year? Divide that by 12 and you have your average monthly earnings. Do you have five years of freelance experience under your belt? Average those years out too and look at the numbers. Hopefully your earning are growing from year to year, but if they aren’t you need to take that into consideration and average out your income for the past few years to get a better sense of what you truly make. Once you have a solid number as your average monthly income, use that number as a baseline for your budget.

My friend Jenny, a freelance designer, gave me her numbers to crunch and here’s what we came up with:

3. Budget for taxes

As Benjamin Franklin said, “in this world nothing can be said to be certain, except death and taxes.” Taxes are a fact and there is no reason for them to surprise you every year.

Many employees get taxes taken out of their paycheck before they ever even see it. In a way it’s nice because what you get is what you keep and there is no need for additional budgeting. As a freelancer the responsibility is on you to pay the government its due at the end of each year.

The easiest way to budget for taxes is to immediately deposit 20% (or whatever is appropriate for your government’s tax rate) of every paycheck into a separate fund. If, like me, you are lazy and don’t want to manually deposit 20% of each check, then set up an automated monthly deposit for 20% of last years average monthly income. Jenny, our freelancer, would set up a recurring monthly deposit of $388. Depending on your tax bracket at the end of the year you may need to pay a little more out of pocket, or you will get a nice little “refund” from your own account, but you won’t be caught with your financial pants down.

4. Track everything

First of all, get separate accounts for your personal and business spending. This allows you to get the most benefit out of being a business owner. Larger businesses have an entire accounting department to keep track of their finances and limit waste. As a freelancer you are also the accounting department and you need to keep track of every business related expense. Did you buy a new tablet this year? Tax writeoff! Did you take a business trip and rent a car? Also a tax writeoff! Did you take your friend out to dinner who also happens to be a designer? We’ll let you decide if that’s a “business meeting” or not.

But tracking your spending doesn’t just allow to you pile on the writeoffs. It also gives you a visual representation of your spending habits and can highlight areas of waste in both your business and personal spending, as well as help you decide how much you can spend each month (see item 5).

Technology has given us some life-altering ways of visualizing our personal finances. My personal favorite is Mint.com (no, I’m not paid by them, just a fan). When you hook your accounts up to Mint it automatically tracks and categorizes every purchase you make through a credit or debit card. It also tracks every time you withdraw cash from an ATM. From here you can view your data in countless ways – by category, by month, year, net profit per months etc. You can look at a pattern from every angle. For instance, here’s a visualization of my restaurant habit:

4 months ago that piece of the pie chart was much larger. I was spending as much dining out as I was paying in rent every month. Tracking my spending helped me face reality and think about my restaurant purchases more carefully while still allowing me to enjoy eating out.

Don’t have access to online tools like Mint? Or maybe you don’t have a bank account and take all your payments in cash? No problem. There is an easy analog way of tracking your finances without fancy gadgets. Use the tried and true method of keeping separate envelopes to organize your separate “accounts.” Stick a post-it note to your wallet, credit/debit card, or phone (or anything you always carry with you), and simply write down a number and description every time you make a purchase or receive a payment. Keep separate envelopes for business and personal receipts so you can get those tax write offs.

5. Take care of yourself

For many freelancers, their business is their life, so any income they make goes right back into the business, rather than toward their own long term savings goals. We all have things we want, or debts we need to pay off. With a little planning we can pay off debts, save for the future, AND have some spending money for something special. Here’s how to do it.

Estimate your monthly taxes. Say they will be about 20% of your income. Write that number down.

Figure out your fixed expenses: How much do you pay for rent each month? Prescriptions? Health insurance? Phone bill? Itemize all of the expenses that you KNOW will happen every month and add those up and write it down.

Open 5 different accounts (or envelopes if you’re old school). It seems like a lot but each one has a different and important function.

Tax Account (20% of total earnings) – This is where you deposit your monthly estimated taxes. This is also the account you will use to pay your taxes at the end of the year.

Emergency Account – This is for when you break your leg, your water heater breaks, your car breaks down, etc. To be used only in emergencies.

Retirement Account – If you’re only 24 years old then this one doesn’t seem very important, but when you are 72 years old you will kick yourself if you didn’t start one of these earlier. This could be a Savings account, 401K, IRA, Roth IRA, or just an envelope under your mattress. Obviously an account that accrues interest will be to your benefit, but anything works.

Save/Spend Account– This is where you save up for that big ticket item you have been eyeing, like a down payment on a car, a tropical vacation, a fancy new camera, a computer, VIP seats at a concert, or purchases that will grow your business.

Set up a budget based on your average monthly income, your expenses, and your savings goals. Use the following example based on Jenny’s income. The 1st and 2nd refer to the priority level of each account:

After Jenny makes her monthly deposits into her Tax, Emergency, Retirement, and Save/Spend account, she deposits the rest into her Living account. Then she only uses $353 of that money for anything that isn’t already budgeted (food, wine, movies, concerts etc.). She doesn’t touch any other account until that specific need arises. If Jenny had debt she would simply add another “debt” account and adjust her 2nd priority numbers so that she could contribute to that fund.

Knowledge is power, and assuming control of finances is one of the most powerful things we can do as freelancers, artists, and individuals.

How do you manage your finances?

The author

Tory is a part of the Community Team at 99designs. She was raised in Palo Alto, California and has a degree in Graphic Design from Loyola Marymount University in Los Angeles. When she isn't working she's probably out of cell phone range in the wilderness, or sipping a local brew. Ideally both.

Any comments?

How much should I save for my business itself? If I make $1,000/month, I pay expenses, taxes, and “pay” my family for groceries, rent, etc. What’s a wise percentage to keep in my business savings account for future expenses, capitol, slow months, etc?